e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission file number 000-26679
ART TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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04-3141918 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number) |
One Main Street, Cambridge, Massachusetts
(Address of principal executive offices)
02142
(Zip Code)
(617) 386-1000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of October 31, 2008 there were 129,594,157 shares of the Registrants common stock outstanding.
ART TECHNOLOGY GROUP, INC.
INDEX TO FORM 10-Q
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ART TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(UNAUDITED)
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September 30, |
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December 31, |
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2008 |
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2007 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
44,601 |
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$ |
34,419 |
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Marketable securities (including restricted cash of $1,669 at September 30, 2008) |
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13,631 |
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16,460 |
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Accounts receivable, net of reserves of $1,287 ($958 in 2007) |
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35,779 |
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40,443 |
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Deferred costs |
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931 |
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790 |
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Prepaid expenses and other current assets |
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3,411 |
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2,741 |
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Total current assets |
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98,353 |
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94,853 |
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Property and equipment, net |
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9,583 |
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7,208 |
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Deferred costs, non-current |
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2,146 |
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2,337 |
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Other assets |
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1,625 |
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1,475 |
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Marketable securities (including restricted cash of $419 at September 30, 2008) |
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419 |
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1,062 |
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Intangible assets, net |
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8,854 |
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11,109 |
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Goodwill |
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67,692 |
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59,675 |
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Total Assets |
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$ |
188,672 |
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$ |
177,719 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
3,648 |
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$ |
3,619 |
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Accrued expenses |
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18,830 |
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19,082 |
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Deferred revenue |
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41,401 |
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35,577 |
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Accrued restructuring |
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371 |
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855 |
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Total current liabilities |
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64,250 |
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59,133 |
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Accrued restructuring, non-current |
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225 |
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Other liabilities |
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498 |
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487 |
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Deferred revenue, non-current |
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11,344 |
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10,777 |
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Commitments and contingencies (Note 9) |
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Stockholders equity: |
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Preferred stock, $0.01 par value; authorized -10,000,000 shares; issued and
outstanding-no shares |
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Common stock, $0.01 par value; authorized-200,000,000 shares; issued -130,983,835
shares and 129,293,221 shares at September 30, 2008 and December 31, 2007,
respectively |
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1,309 |
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1,293 |
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Additional paid-in capital |
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312,832 |
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305,151 |
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Accumulated deficit |
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(195,453 |
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(195,745 |
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Treasury stock, at cost (1,409,142 and 986,960 shares at September 30, 2008 and
December 31, 2007, respectively) |
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(4,381 |
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(2,902 |
) |
Accumulated other comprehensive loss |
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(1,727 |
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(700 |
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Total stockholders equity |
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112,580 |
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107,097 |
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Total Liabilities and Stockholders Equity |
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$ |
188,672 |
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$ |
177,719 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
ART TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue: |
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Product licenses |
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$ |
10,764 |
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$ |
7,873 |
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$ |
32,321 |
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$ |
20,997 |
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Recurring services |
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23,446 |
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19,346 |
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67,335 |
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55,335 |
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Professional and education services |
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6,584 |
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8,667 |
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19,588 |
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21,402 |
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Total revenue |
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40,794 |
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35,886 |
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119,244 |
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97,734 |
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Cost of Revenue: |
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Product licenses |
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539 |
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557 |
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1,445 |
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1,646 |
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Recurring services |
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8,611 |
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6,165 |
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25,458 |
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16,687 |
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Professional and education services |
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6,393 |
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7,587 |
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19,802 |
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20,356 |
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Total cost of revenue |
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15,543 |
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14,309 |
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46,705 |
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38,689 |
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Gross Profit |
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25,251 |
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21,577 |
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72,539 |
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59,045 |
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Operating Expenses: |
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Research and development |
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7,660 |
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6,632 |
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22,054 |
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18,683 |
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Sales and marketing |
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12,282 |
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11,697 |
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36,975 |
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33,014 |
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General and administrative |
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4,890 |
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4,489 |
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14,082 |
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13,740 |
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Restructuring |
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9 |
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(59 |
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Total operating expenses |
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24,832 |
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22,827 |
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73,111 |
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65,378 |
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Income (loss) from operations |
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419 |
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(1,250 |
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(572 |
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(6,333 |
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Interest and other income, net |
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232 |
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575 |
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1,100 |
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1,544 |
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Income (loss) before provision for income taxes |
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651 |
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(675 |
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528 |
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(4,789 |
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Provision (benefit) for income taxes |
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(135 |
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85 |
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236 |
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180 |
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Net income (loss) |
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$ |
786 |
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$ |
(760 |
) |
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$ |
292 |
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$ |
(4,969 |
) |
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Basic net income (loss) per share |
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$ |
0.01 |
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$ |
(0.01 |
) |
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$ |
0.00 |
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$ |
(0.04 |
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Diluted net income (loss) per share |
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$ |
0.01 |
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$ |
(0.01 |
) |
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$ |
0.00 |
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$ |
(0.04 |
) |
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Basic weighted average common shares outstanding |
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129,219 |
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127,461 |
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128,821 |
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127,349 |
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Diluted weighted average common shares outstanding |
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135,697 |
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127,461 |
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134,934 |
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127,349 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ART TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
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Nine Months Ended September 30, |
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2008 |
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2007 |
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Cash Flows from Operating Activities: |
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Net income (loss) |
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$ |
292 |
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$ |
(4,969 |
) |
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Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
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Depreciation and amortization |
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6,518 |
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5,760 |
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Non-cash stock-based compensation expense |
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5,824 |
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4,114 |
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Changes in current assets and liabilities: |
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Accounts receivable |
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4,797 |
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|
2,099 |
|
Prepaid expenses and other current assets |
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(810 |
) |
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(2,076 |
) |
Deferred costs |
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50 |
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(2,532 |
) |
Increase in other assets |
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(57 |
) |
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Accounts payable |
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29 |
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204 |
|
Accrued expenses and other liabilities |
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155 |
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|
2,737 |
|
Deferred revenue |
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6,391 |
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17,664 |
|
Accrued restructuring |
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(709 |
) |
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(975 |
) |
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Net cash provided by operating activities |
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22,480 |
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|
22,026 |
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Cash Flows from Investing Activities: |
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Purchases of marketable securities |
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(17,225 |
) |
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(9,212 |
) |
Maturities of marketable securities |
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22,492 |
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14,625 |
|
Purchases of property and equipment |
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(5,612 |
) |
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(3,123 |
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Collateralization of letters of credit |
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(2,088 |
) |
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Payment of acquisition costs, net of cash acquired |
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(9,522 |
) |
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(829 |
) |
Increase in other assets |
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(22 |
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Net cash (used in) provided by investing activities |
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(11,955 |
) |
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|
1,439 |
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Cash Flows from Financing Activities: |
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Proceeds from exercise of stock options |
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1,608 |
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1,223 |
|
Proceeds from employee stock purchase plan |
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|
754 |
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|
649 |
|
Repurchase of common stock |
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(1,479 |
) |
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(2,190 |
) |
Payments of employee restricted stock tax withholdings |
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|
(505 |
) |
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|
Payments on capital leases |
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(52 |
) |
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Net cash provided by (used in) financing activities |
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|
378 |
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|
(370 |
) |
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|
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|
Effect of foreign exchange rate changes on cash and cash equivalents |
|
|
(721 |
) |
|
|
91 |
|
|
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|
Net increase in cash and cash equivalents |
|
|
10,182 |
|
|
|
23,186 |
|
|
|
|
|
|
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|
Cash and cash equivalents, beginning of period |
|
|
34,419 |
|
|
|
17,911 |
|
|
|
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|
|
|
|
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|
Cash and cash equivalents, end of period |
|
$ |
44,601 |
|
|
$ |
41,097 |
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|
|
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|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization, Business and Summary of Significant Accounting Policies
Art Technology Group, Inc. (ATG or the Company) develops and markets a comprehensive suite
of e-commerce software products, and provides related services, including support and maintenance,
education, application hosting, professional services and e-commerce optimization services for
enhancing online sales and support.
(a) Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements of the Company have
been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports
on Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include
all of the information and footnotes required by United States generally accepted accounting
principles, and while the Company believes that the disclosures presented are adequate to make the
information presented not misleading, these financial statements should be read in conjunction with
the audited financial statements and related notes included in the Companys 2007 Annual Report on
Form 10-K. In the opinion of management, the accompanying unaudited condensed consolidated
financial statements and notes contain all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation of the Companys financial position, results of
operations and cash flows at the dates and for the periods indicated. Certain amounts have been
reclassified to conform to the current period presentation. Such reclassifications were not
material to the consolidated financial statements. The operating results for the three and nine
months ended September 30, 2008 are not necessarily indicative of the results to be expected for
the full year ending December 31, 2008.
The accompanying consolidated financial statements include the accounts of ATG and its wholly
owned subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation.
(b) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during
the reporting period. Such estimates relate to revenue recognition, the allowance for doubtful
accounts, useful lives of fixed assets and identifiable intangible assets, deferred costs, accrued
liabilities, accrued taxes, deferred tax valuation allowances and assumptions pertaining to
share-based payments. Actual results could differ from those estimates.
(c) Accounts Receivable
Accounts receivable represent amounts currently due from customers for which revenue has been
recognized or is being recognized ratably in future periods. Accounts receivable also include $2.1
million and $1.6 million of unbilled accounts receivable at September 30, 2008 and December 31,
2007, respectively. Unbilled receivables consist of future billings for work performed but not yet
invoiced to the customer. Unbilled accounts receivable are generally invoiced within the following
month.
(d) Revenue Recognition
ATG derives revenue from the following sources: (1) perpetual software licenses, (2) recurring
services, which are comprised of support and maintenance services, application hosting services and
e-commerce optimization services, and (3) professional and education services. ATG sells these
product and service offerings individually or more commonly in multiple element arrangements under
various arrangements as follows: 1. Sale of Perpetual Software Licenses, 2. Sale of Application
Hosting Agreements, and 3. Sale of e-Commerce Optimization Services. The Company recognizes revenue
in accordance with AICPA Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), or
Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition (SAB
104), applying the provisions of Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables (EITF 00-21), depending on the nature of the arrangement.
6
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue is recognized only when persuasive evidence of an arrangement exists, the fee is fixed
or determinable, the product or service has been delivered, and collectability of the resulting
receivable is probable. One of the significant judgments ATG makes related to revenue recognition
is evaluating the customers ability to pay for the products or services provided. This judgment is
based on a combination of factors, including the completion of a credit check or financial review,
payment history with the customer and other forms of payment assurance. Upon the completion of
these steps and provided all other revenue recognition criteria are met, ATG recognizes revenue
consistent with its revenue recognition policies provided below.
1. Sales of Perpetual Software Licenses
ATG licenses software under perpetual license agreements and applies the provisions of SOP
97-2, as amended by SOP 98-9, Modifications of SOP 97-2, Software Revenue Recognition, With Respect
to Certain Transactions. In accordance with SOP 97-2 and SOP 98-9, revenue from software license
agreements is recognized when the following criteria are met: (1) execution of a legally binding
license agreement, (2) delivery of the software, which is generally through electronic license keys
for the software, (3) the fee is fixed or determinable, as determined by the Companys customary
payment terms, and free of contingencies or significant uncertainties as to payment, and (4)
collection is deemed probable by management based on a credit evaluation of the customer. In
addition, under multiple element arrangements, to recognize software license revenue up-front, the
Company must have vendor-specific objective evidence (VSOE) of fair value of the undelivered
elements in the transaction. Substantially all of the Companys software license arrangements do
not include acceptance provisions. However, if conditions for acceptance subsequent to delivery are
required, revenue is recognized upon customer acceptance if such acceptance is not deemed to be
perfunctory.
In connection with the sale of its software licenses, ATG sells support and maintenance
services, which are recognized ratably over the term of the arrangement, typically one year. Under
support and maintenance services, customers receive unspecified software product upgrades,
maintenance and patch releases during the term, and internet and telephone access to technical
support personnel. Support and maintenance is priced as a percent of the net software license fee
and is based on the contracted level of support.
Many of the Companys software arrangements also include professional services for consulting
implementation services sold separately under consulting engagement contracts. Professional
services revenue from these arrangements is generally accounted for separately from the software
license because the services qualify as a separate element under SOP 97-2. The more significant
factors considered in determining whether professional services revenue should be accounted for
separately include the nature of services (i.e., consideration of whether the services are
essential to the functionality of the licensed product), degree of risk, availability of services
from other vendors, timing of payments, and impact of milestones or acceptance criteria on the
realizability of the software license fee. Professional services revenue under these arrangements
is recognized as the services are performed on a time and materials basis using the proportional
performance method.
Education revenue, which is recognized as the training is provided to customers, is derived
from instructor led training classes either at ATG or the customer location.
For software arrangements with multiple elements, the Company applies the residual method in
accordance with SOP 98-9. The residual method requires that the portion of the total arrangement
fee attributable to the undelivered elements be deferred based on its VSOE of fair value and
subsequently recognized over the period as the service is delivered. The difference between the
total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue
related to the delivered elements, which is generally the software license. VSOE of fair value for
all elements in an arrangement is based upon the normal pricing for those products and services
when sold separately. VSOE of fair value for support and maintenance services is additionally
determined by the renewal rate in customer contracts. The Company has established VSOE of fair
value for support and maintenance services, professional services, and education. The Company has
not established VSOE for its software licenses, application hosting services or e-commerce
optimization services. In arrangements that do not include application hosting services or
e-commerce optimization services, product license revenue is generally recognized upon delivery of
the software products.
7
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Sales of Application Hosting Services and Professional Services
ATG derives revenue from application hosting services either from hosting ATG perpetual
software licenses purchased by the customer or by providing software as a service solution to the
customer in an arrangement in which the customer does not have the rights to the software license
itself but can use the software for the contracted term. In both situations, ATG recognizes
application hosting revenue in accordance with EITF Issue No. 00-3, Application of AICPA Statement
of Position 97-2 to Arrangements that Include the Right to Use Software Stored on Another Entitys
Hardware (EITF 00-3), SAB 104 and EITF 00-21.
In accordance with EITF 00-3, these arrangements are not within the scope of SOP 97-2, and as
such, ATG applies the provisions of SAB 104 and EITF 00-21 and accounts for the arrangement as a
service contract. Pursuant to EITF 00-21, all elements of the arrangement are considered to be one
unit of accounting. The elements in these arrangements generally include set-up and implementation
services, support and maintenance services, the monthly hosting service and in certain instances a
perpetual software license. All fees received up-front under these arrangements, regardless of the
nature of the element, are deferred until the application hosting service commences, which is
referred to as the go live date. Upon go live, the up-front fees are recognized ratably over the
hosting period or estimated life of the customer arrangement, whichever is longer. ATG currently
estimates the life of the customer arrangement to be four years. In addition, the monthly
application hosting service fee is recognized as the application hosting service is provided.
3. Sales of e-Commerce Optimization Services
ATG derives revenue from e-commerce optimization services, which are hosted services that
enable customers to increase their volume of sales and margin on those sales. e-commerce
optimization services are site-independent and are not required to be used in conjunction with
ATGs software products. These services are a stand-alone independent service solution, that are
typically contracted for a one-year term. The Company recognizes revenue on a monthly basis as the
services are provided. Fees are generally based on monthly minimums and transaction volumes. In
certain instances e-commerce optimization services are bundled with ATG software arrangements,
which typically include support and maintenance services and professional services for the
perpetual software license. Since the Company does not have VSOE of fair value for e-commerce
optimization services, the up-front fees received under the arrangement are deferred and recognized
ratably over the period of providing the e-commerce optimization services, provided that the
professional services, if applicable, have commenced.
In certain instances, the Company sells perpetual software licenses with application hosting
services and e-commerce optimization services. As noted above, in these situations all elements in
the arrangement, for which the Company receives up-front fees, are recognized as revenue ratably
over the period of providing the related service.
The Company allocates and classifies revenue in its statement of operations based on its
evaluation of VSOE of fair value, or a proxy of fair value thereof, available for each applicable
element of the transaction: professional services, support and maintenance services, application
hosting services, and/or e-commerce optimization services. ATG uses the residual method to
determine the amount of revenue to allocate to product license revenue. As noted, the fee for each
element is recognized ratably, and as such, a portion of software license revenue recorded in the
statement of operations is from these ratably recognized arrangements.
(e) Deferred Costs
The Company defers direct costs incurred for the set-up and implementation of application
hosting services until commencement of the application hosting service. In addition, for
arrangements that require the Company to defer professional services revenue, such as arrangements
in which the Company does not have VSOE of fair value for an undelivered element in an arrangement,
the Company defers the direct costs incurred prior to delivery of the element related to performing
the professional services. Deferred costs are amortized to cost of revenue ratably over the period
of recognizing the related revenue under the customer arrangement. Deferred costs include
incremental direct third party costs and specific internal direct costs, such as direct salary and
benefits, related to the set-up and implementation services and professional services. Total
deferred costs were $3.1 million at each of September 30, 2008 and December 31, 2007.
8
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(f) Comprehensive Loss
Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive Income, requires financial statements to include the
reporting of comprehensive income (loss), which includes net income (loss) and certain transactions
that have generally been reported in the statement of stockholders equity. ATGs comprehensive
income (loss) consists of net income (loss), foreign currency translation adjustments and
unrealized gains and losses on available-for-sale securities. The components of comprehensive
income (loss) at September 30, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net income (loss) |
|
$ |
786 |
|
|
$ |
(760 |
) |
|
$ |
292 |
|
|
$ |
(4,969 |
) |
Foreign currency translation adjustment |
|
|
(868 |
) |
|
|
247 |
|
|
|
(734 |
) |
|
|
53 |
|
Unrealized loss on available-for-sale securities |
|
|
(270 |
) |
|
|
|
|
|
|
(293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(352 |
) |
|
$ |
(513 |
) |
|
$ |
(735 |
) |
|
$ |
(4,916 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(g) Classification of Marketable Securities
In the first quarter of 2008, the Company transferred its marketable securities classified as
held-to-maturity to available-for-sale in accordance with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, as amended, due to selling certain debt securities prior
to their maturity dates in order to finance the closing of the CleverSet acquisition. The total
transfer was $17.5 million (at amortized cost) of marketable securities with an unrealized loss of
$1,000. Available-for-sale securities are recorded at fair value. At September 30, 2008 the
Company held $14.1 million of marketable securities with an unrealized loss of $0.3 million.
(h) Concentrations of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to concentrations of credit risk
consist principally of marketable securities and accounts receivable. ATG maintains cash, cash
equivalents and marketable securities with high credit quality financial institutions. To reduce
its concentration of credit risk with respect to accounts receivable, the Company routinely
assesses the financial strength of its customers through continuing credit evaluations. The Company
generally does not require collateral.
At September 30, 2008 and December 31, 2007, no customer balance accounted for 10% or more of
accounts receivable. No customer accounted for 10% or more of total revenue in the three and nine
month periods ended September 30, 2008 and September 30, 2007.
(i) New Accounting Pronouncements
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133 (SFAS 161), which establishes, among
other things, the disclosure requirements for derivative instruments and for hedging activities.
SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in derivative
agreements. This statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company is not currently involved in hedging
activities. The adoption of this statement is not expected to have any impact to the Companys
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51, (SFAS 160), which amends ARB 51 to establish
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also amends certain of ARB 51s consolidation procedures for
consistency with the requirements of SFAS 141( R), Business Combinations. This Statement will be
effective for financial statements issued for fiscal years and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of
this statement is not expected to have a material impact to the Companys consolidated financial
statements.
9
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In December 2007, the FASB issued SFAS 141(R), Business Combinations (SFAS 141(R)), a
replacement of SFAS No. 141. SFAS 141(R) is effective for fiscal years beginning on or after
December 15, 2008 and applies to all business combinations. SFAS 141(R) provides that, upon
initially obtaining control, an acquirer shall recognize 100% of the fair values of acquired
assets, including goodwill, and assumed liabilities, with only limited exceptions, even if the
acquirer has not acquired 100% of its target. As a consequence, the current step acquisition model
will be eliminated. Additionally, SFAS 141(R) changes current practice, in part, as follows: (1)
contingent consideration arrangements will be fair valued at the acquisition date and included on
that basis in the purchase price consideration; (2) transaction costs will be expensed as incurred,
rather than capitalized as part of the purchase price; (3) pre-acquisition contingencies, such as
legal issues, will generally be accounted for in purchase accounting at fair value; (4) the
requirements in FASB SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, have to be met at the acquisition date to accrue for a restructuring plan in purchase
accounting; and (5) in-process research and development charges will no longer be recorded. While
there is no expected impact to the Companys consolidated financial statements on the accounting
for acquisitions completed prior to December 31, 2008, the adoption of SFAS 141(R) on January 1,
2009 could materially change the accounting for any business combinations consummated subsequent to
that date.
(2) Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding during the period. Diluted net income (loss)
per share is computed by dividing net income (loss) by the weighted average number of shares of
common stock outstanding plus the dilutive effect of common stock equivalents using the treasury
stock method. Common stock equivalents consist of stock options, restricted stock and restricted
stock unit awards. In accordance with SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
123R), the assumed proceeds under the treasury stock method include the average unrecognized
compensation expense of stock options that are in-the-money, restricted stock and restricted stock
unit awards. This results in the assumed buyback of additional shares, thereby reducing the
dilutive impact of stock options, restricted stock and restricted stock unit awards.
The following table sets forth the computation of basic and diluted net loss per share for the
three and nine month periods ended September 30, 2008 and 2007 (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income (loss) |
|
$ |
786 |
|
|
$ |
(760 |
) |
|
$ |
292 |
|
|
$ |
(4,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding used in computing basic net
income per share |
|
|
129,219 |
|
|
|
127,461 |
|
|
|
128,821 |
|
|
|
127,349 |
|
Dilutive employee common stock equivalents |
|
|
6,478 |
|
|
|
|
|
|
|
6,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average common stock and
common stock equivalent shares
outstanding used in computing diluted net
income per share |
|
|
135,697 |
|
|
|
127,461 |
|
|
|
134,934 |
|
|
|
127,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.01 |
|
|
$ |
(0.01 |
) |
|
$ |
0.00 |
|
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
0.01 |
|
|
$ |
(0.01 |
) |
|
$ |
0.00 |
|
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive common stock equivalents |
|
|
7,559 |
|
|
|
16,985 |
|
|
|
7,246 |
|
|
|
17,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) Stock-Based Compensation
The Company accounts for stock-based compensation pursuant to SFAS 123R. Stock-based
compensation cost recognized includes: (a) compensation cost for all share-based payments granted
prior to but not yet vested as of December 31, 2005, based on the grant-date fair value estimated
in accordance with the provisions of SFAS 123, and (b) compensation cost for all share-based
payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123R.
10
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Grant-Date Fair Value
The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value
of stock options. Information pertaining to stock options granted during the nine months ended
September 30, 2008 and 2007 and related weighted average assumptions is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
Stock Options |
|
2008 |
|
2007 |
Options granted (in thousands) |
|
|
1,573 |
|
|
|
1,227 |
|
Weighted-average exercise price |
|
$ |
3.69 |
|
|
$ |
2.65 |
|
Weighted-average grant date fair value |
|
$ |
2.42 |
|
|
$ |
2.08 |
|
Assumptions: |
|
|
|
|
|
|
|
|
Expected volatility |
|
|
70.8 |
% |
|
|
85.3 |
% |
Expected term (in years) |
|
|
6.25 |
|
|
|
6.25 |
|
Risk-free interest rate |
|
|
3.60 |
% |
|
|
4.93 |
% |
Expected dividend yield |
|
|
|
|
|
|
|
|
Expected volatility The Company has determined that the historical volatility of its common
stock is the best indicator of the future volatility of the Companys common stock. As such, the
Company uses historical volatility to estimate the grant-date fair value of stock options.
Historical volatility is calculated for the period that is commensurate with the stock options
expected term.
Expected term Since adopting SFAS 123R the Company has been unable to use historical
employee exercise and option expiration data to estimate the expected term assumption for the
Black-Scholes grant-date valuation. The Company utilizes the safe harbor provision in Staff
Accounting Bulletin No. 107 (as extended by Staff Accounting Bulletin No. 110) to determine the
expected term of its stock options.
Risk-free interest rate The yield on zero-coupon U.S. Treasury securities for a period that
is commensurate with the expected term is used as the risk-free interest rate.
Expected dividend yield The Companys Board of Directors historically has not declared cash
dividends and does not expect to issue cash dividends in the future. As such, the Company uses a 0%
expected dividend yield.
Stock-Based Compensation Expense
The Company uses the straight-line attribution method to recognize stock-based compensation
expense for awards that vest solely based on a requisite service period. The amount of stock-based
compensation expense recognized during a period is based on the value of the portion of the awards
that are ultimately expected to vest. SFAS 123R requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates. The term forfeitures is distinct from cancellations or expirations and represents
only the unvested portion of the surrendered option. The Company has applied an annual forfeiture
rate of 6.1% to all unvested options as of September 30, 2008. This analysis is re-evaluated
quarterly and the forfeiture rate is adjusted as necessary. Ultimately, the actual expense
recognized over the vesting period will only be for those stock options that vest.
During the nine months ended September 30, 2008, the Company granted restricted stock units
(RSUs) covering an aggregate of 2,601,200 shares of its common stock with a total fair value of
$9.2 million. The fair value of the RSU grants is based on the market price of ATGs common stock
on the date of grant. The RSU grants provide the holder with the right to receive shares of ATG
common stock upon vesting. The Company did not grant any restricted stock awards (RSAs) during
the nine months ended September 30, 2008.
11
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Stock-based compensation expense related to RSU grants is generally recognized on a
straight-line basis over the requisite service period. Most of the RSU awards vest based on the
lapse of time (i.e. service period). These time-based RSUs vest 25% annually beginning
approximately one year after the date of grant. Some of the RSU awards are subject to performance
criteria. These performance-based RSUs vest 25% annually if a specified annual adjusted operating
profit goal is met and will vest in full, immediately, if a specified revenue goal is met. The
Company believes it is probable the annual adjusted operating profit goal will be achieved,
resulting in stock-based compensation expense being recognized over the requisite service period on
an accelerated basis as required by SFAS 123R for performance-based awards. The achievement of the
performance criteria for the awards to immediately vest is currently not deemed to be probable by
the Company.
RSU grants to the Companys Board of Directors generally occur in the second quarter of each
fiscal year. The RSU grants to members of the Companys Board of Directors vest at the end of one
year, and the related stock-based compensation expense is recognized ratably over one year.
As of
September 30, 2008, there was $18.4 million of total unrecognized compensation cost
related to unvested awards of stock options and RSUs. That cost is expected to be recognized over a
weighted-average period of 2.9 years.
During the three months ended September 30, 2008 and 2007, stock-based compensation expense
related to stock options, RSA and RSU awards was $2.0 million and $1.6 million, respectively.
During the nine months ended September 30, 2008 and 2007, stock-based compensation expense related
to stock options, RSA and RSU awards was $5.8 million and $4.1 million, respectively
Stock Award Activity
A summary of the activity under the Companys stock option plans as of September 30, 2008 and
changes during the nine-month period then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
|
|
|
Exercise |
|
Remaining |
|
Aggregate |
|
|
Options |
|
Price |
|
Contractual |
|
Intrinsic |
|
|
Outstanding |
|
Per Share |
|
Term in Years |
|
Value |
Options outstanding at December 31, 2007 |
|
|
14,147 |
|
|
$ |
2.62 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
1,573 |
|
|
|
3.69 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(983 |
) |
|
|
1.64 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(835 |
) |
|
|
2.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2008 |
|
|
13,902 |
|
|
$ |
2.81 |
|
|
|
6.3 |
|
|
$ |
20,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2008 |
|
|
10,013 |
|
|
$ |
2.75 |
|
|
|
5.4 |
|
|
$ |
18,303 |
|
Options vested or expected to vest at
September 30, 2008 (1) |
|
|
13,608 |
|
|
$ |
2.94 |
|
|
|
6.3 |
|
|
$ |
20,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In addition to the vested options, the Company expects a portion of the unvested options to
vest at some point in the future. Options expected to vest is calculated by applying an
estimated forfeiture rate to the unvested options. |
During the nine months ended September 30, 2008 and 2007, the total intrinsic value of options
exercised (i.e. the difference between the market price at exercise and the price paid by the
employee to exercise the options) was $2.2 million and $0.9 million, respectively, and the total
amount of cash received from exercise of these options was $1.6 million and $1.2 million,
respectively.
12
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Companys RSA and RSU award activity as of September 30, 2008 and changes
during the period then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
Weighted |
|
|
Share and |
|
Average Grant |
|
|
Unit Awards |
|
Date Fair Value |
|
|
Outstanding |
|
Per Share |
|
|
(in thousands) |
|
|
|
|
Non-vested awards outstanding at December 31, 2007 |
|
|
2,359 |
|
|
$ |
2.57 |
|
Awards granted |
|
|
2,601 |
|
|
|
3.54 |
|
Restrictions lapsed |
|
|
(598 |
) |
|
|
2.36 |
|
Awards forfeited |
|
|
(518 |
) |
|
|
3.25 |
|
|
|
|
|
|
|
|
|
|
Non-vested awards outstanding at September 30, 2008 |
|
|
3,844 |
|
|
$ |
3.17 |
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2008 and 2007, the total fair value of awards
vested was $1.4 million and $0.4 million, respectively.
(4) Share Repurchase Program
On April 19, 2007 the Companys Board of Directors authorized a stock repurchase program
providing for the repurchase of up to $20 million of its outstanding common stock in the open
market or in privately negotiated transactions, at times and prices considered appropriate
depending on the prevailing market conditions. For the nine months ended September 30, 2008, the
Company repurchased 422,182 shares of its common stock at a cost of $1.5 million. For the life of
the stock repurchase program to date, the Company has repurchased 1,409,142 shares of its common
stock at a cost of $4.4 million.
(5) Disclosures About Segments of an Enterprise
SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information (SFAS
131), establishes standards for reporting information regarding operating segments in annual
financial statements. SFAS 131 also requires related disclosures about products and services and
geographic areas. Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief operating decision
maker in making decisions on how to allocate resources and assess performance. The Companys chief
operating decision maker is its chief executive officer. To date, the Company has viewed its
operations and manages its business as principally one segment with three product offerings:
software licenses, recurring services, and professional and education services. The Company
evaluates these product offerings based on their revenue and gross margins. As a result, the
financial information disclosed in the consolidated financial statements represents all of the
material financial information related to the Companys principal operating segment.
Revenue from sources outside of the United States was approximately $10.9 million and $13.8
million for the three months ended September 30, 2008 and 2007, respectively, and $34.2 million and
$30.7 million for the nine months ended September 30, 2007 and 2008, respectively. Revenues from
international sources were primarily generated from customers located in Europe and the
Asia/Pacific region. All of the Companys software sales are delivered from its headquarters
located in the United States.
The following table represents the percentage of total revenue by geographic region for the
three and nine months ended September 30, 2008 and September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
United States |
|
|
72 |
% |
|
|
61 |
% |
|
|
71 |
% |
|
|
69 |
% |
United Kingdom (UK) |
|
|
9 |
|
|
|
16 |
|
|
|
10 |
|
|
|
14 |
|
Europe, Middle East and Africa (excluding UK) |
|
|
17 |
|
|
|
21 |
|
|
|
17 |
|
|
|
15 |
|
Other |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(6) Fair Value Measurement
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS
157). SFAS 157 clarifies the definition of fair value, prescribes methods for measuring fair
value, establishes a fair value hierarchy based on the inputs used to measure fair value, and
expands disclosures about the use of fair value measurements. The adoption of SFAS 157 did not have
a material impact on the Companys financial statements.
As defined in SFAS 157, fair value is based on the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. In order to increase consistency and comparability in fair value measurements,
SFAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs
used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement
date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1
inputs.
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for
similar assets and liabilities or market corroborated inputs.
Level 3: Unobservable inputs are used when little or no market data is available, which requires
the Company to develop its own assumptions about how market participants would value the assets
or liabilities. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs to the extent possible in its
assessment of fair value.
The following table presents the Companys financial assets and liabilities that are carried
at fair value, classified according to the three categories described above (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2008 |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Unobservable Inputs |
|
Assets |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Cash equivalents |
|
$ |
3,719 |
|
|
$ |
2,023 |
|
|
$ |
1,696 |
|
|
|
|
|
Short-term available-for- sale securities |
|
|
12,067 |
|
|
|
606 |
|
|
|
11,461 |
|
|
|
|
|
Long-term available- for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
15,786 |
|
|
$ |
2,629 |
|
|
$ |
13,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys available-for-sale securities consist of commercial paper and corporate debt
securities.
(7) Restricted Cash
The Company has collateralized $2.1 million in outstanding letters of credit with certificates
of deposit. The collateral for the letters of credit is reflected on the Companys balance sheet as
restricted cash within short-term and long-term marketable securities dependent on the underlying
term of the lease. The letters of credit were issued in favor of various landlords to secure
obligations under ATGs facility leases pursuant to leases expiring through December 2011.
14
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(8) Acquisitions CleverSet
On February 5, 2008, the Company acquired all of the outstanding shares of common stock of
privately held eShopperTools.com, Inc., dba CleverSet (CleverSet) for a purchase price of
approximately $9.4 million, comprised of $9.2 million paid to the shareholders, including the
extinguishment of convertible debt, and acquisition costs of $0.2 million. The purchase of
CleverSet augments the Companys e-commerce optimization service offerings with CleverSets
automated personalization engines, which present e-commerce visitors with relevant recommendations
and information designed to increase conversion rates and order size.
In determining the purchase price allocation, the Company considered, among other factors, the
expected use of the acquired assets, historical demand and estimates of future demand of
CleverSets products and services. The fair value of intangible assets was primarily determined
using the income approach, which is based upon a forecast of the expected future net cash flows
associated with the assets. These net cash flows were then discounted to a present value by
applying a discount rate of 10% to 40%. The discount rate was determined after consideration of
CleverSets weighted average cost of capital and the risk associated with achieving forecast sales
related to the technology and assets acquired from CleverSet.
The purchase price has been allocated on a basis based on the estimated fair values as of the
acquisition date. The following represents the allocation of the purchase price (in thousands):
|
|
|
|
|
Cash |
|
$ |
270 |
|
Accounts receivable |
|
|
131 |
|
Prepaid expenses and other assets |
|
|
330 |
|
Property, plant and equipment |
|
|
56 |
|
Goodwill |
|
|
8,138 |
|
Intangible assets: |
|
|
|
|
Customer relationships (estimated useful life of 3 years) |
|
|
160 |
|
Developed product technology (estimated useful life of 3 years) |
|
|
810 |
|
|
|
|
|
Total intangible assets |
|
|
970 |
|
Accounts payable |
|
|
(191 |
) |
Accrued expenses |
|
|
(289 |
) |
|
|
|
|
Total purchase price |
|
$ |
9,415 |
|
|
|
|
|
The consolidated financial statements include the results of CleverSet from the date of
acquisition. The following unaudited consolidated pro forma financial information, which assumes
the CleverSet acquisition occurred as of January 1, 2007, is presented after giving effect to
certain adjustments, primarily amortization of intangible assets. The unaudited consolidated pro
forma financial information is not necessarily indicative of the results that would have occurred
had the acquisition been in effect for the periods presented or of results that may occur in the
future (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended |
|
|
|
|
September 30, |
|
Nine Months Ended September 30, |
|
|
2007 |
|
2008 |
|
2007 |
|
|
(in thousands) |
Pro forma revenue |
|
$ |
36,527 |
|
|
$ |
119,342 |
|
|
$ |
99,135 |
|
Pro forma net loss |
|
|
(1,215 |
) |
|
|
(245 |
) |
|
|
(7,229 |
) |
Pro forma net loss per share basic and diluted |
|
$ |
(0.01 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.06 |
) |
15
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(9) Commitments and Contingencies
Indemnifications
The Company in general agrees to indemnification provisions in its software license agreements
and real estate leases in the ordinary course of its business.
With respect to software license agreements, these indemnifications generally include
provisions indemnifying the customer against losses, expenses, and liabilities from damages that
may be awarded against the customer in the event the Companys software is found to infringe upon
the intellectual property rights of others. The software license agreements generally limit the
scope of and remedies for such indemnification obligations in a variety of industry-standard
respects. The Company relies on a combination of patent, copyright, trademark and trade secret laws
and restrictions on disclosure to protect its intellectual property rights. The Company believes
such laws and practices, along with its internal development processes and other policies and
practices, limit its exposure related to the indemnification provisions of the software license
agreements. However, in recent years there has been significant litigation in the United States
involving patents and other intellectual property rights. Companies providing Internet-related
products and services are increasingly bringing and becoming subject to suits alleging infringement
of proprietary rights, particularly patent rights. From time to time, the Companys customers have
been subject to third party patent claims, and the Company has agreed to indemnify these customers
from claims to the extent the claims relate to our products.
With respect to real estate lease agreements or settlement agreements with landlords, these
indemnifications typically apply to claims asserted against the landlord relating to personal
injury and property damage at the leased premises or to certain breaches of the Companys
contractual obligations or representations and warranties included in the settlement agreements.
These indemnification provisions generally survive the termination of the respective
agreements, although the provision generally has the most relevance during the contract term and
for a short period of time thereafter. The maximum potential amount of future payments that the
Company could be required to make under these indemnification provisions is unlimited. The Company
has purchased insurance that reduces its monetary exposure for landlord indemnifications, and the
Company has not recorded any claims or paid out any amounts related to indemnification provisions
in its real estate lease agreements.
(10) Restructuring
During the years 2001 through 2005, the Company initiated restructuring actions to realign its
operating expenses and facilities with the requirements of its business and current market
conditions and recorded adjustments to prior restructuring charges. These actions have included
closure and consolidation of excess facilities, reductions in the number of its employees,
abandonment or disposal of tangible assets and settlement of contractual obligations. In connection
with each of these actions, the Company recorded restructuring charges based in part upon estimates
of the costs ultimately to be paid for the actions it has taken. When circumstances result in
changes in ATGs estimates relating to accrued restructuring costs, these changes are recorded as
additional charges or benefits in the period in which the change in estimate occurs. As of
September 30, 2008, the Company had an accrued restructuring liability of $0.4 million consisting
of facility related costs.
A summary of the Companys changes in estimates and activity in its restructuring accruals is
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
2001 |
|
|
|
|
|
|
Actions |
|
|
Actions |
|
|
Total |
|
Balance December 31, 2007 |
|
$ |
133 |
|
|
$ |
947 |
|
|
$ |
1,080 |
|
Facility related payments |
|
|
(79 |
) |
|
|
(630 |
) |
|
|
(709 |
) |
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2008 |
|
$ |
54 |
|
|
$ |
317 |
|
|
$ |
371 |
|
|
|
|
|
|
|
|
|
|
|
16
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2008, the amounts accrued related to ongoing lease arrangements on two
abandoned facilities. The restructuring accrual is net of the contractual amounts due under
executed sub-lease agreements.
For additional information on the Companys restructuring actions, please see the Companys
Annual Report on Form 10-K for the year ended December 31, 2007.
(11) Goodwill and Intangible Assets
Goodwill
The Company evaluates goodwill for impairment annually and whenever events or changes in
circumstances suggest that the carrying value of goodwill may not be recoverable. No impairment of
goodwill resulted from the Companys most recent evaluation of goodwill for impairment, which
occurred in the fourth quarter of fiscal 2007, nor in any of the periods presented. The Companys
next annual impairment assessment will be made in the fourth quarter of 2008. The following table
presents the changes in goodwill during fiscal 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
|
|
|
Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Balance at the beginning of the year |
|
$ |
59,675 |
|
|
$ |
59,328 |
|
Acquisition of CleverSet |
|
|
8,138 |
|
|
|
|
|
eStara earn-out payment |
|
|
|
|
|
|
621 |
|
Collection of eStara accounts
receivable previously reserved and
other adjustment |
|
|
(121 |
) |
|
|
(274 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
67,692 |
|
|
$ |
59,675 |
|
|
|
|
|
|
|
|
Intangible Assets
The Company reviews identified intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying value of the assets may not be recoverable. Recoverability
of these assets is measured by comparison of their carrying value to future undiscounted cash flows
the assets are expected to generate over their remaining economic lives. If such assets are
considered to be impaired, the impairment to be recognized in the statement of operations equals
the amount by which the carrying value of the assets exceeds their fair value determined by either
a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique.
Intangible assets which will continue to be amortized consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
December 31, 2007 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
Customer relationships |
|
$ |
11,660 |
|
|
$ |
(7,813 |
) |
|
$ |
3,847 |
|
|
$ |
11,500 |
|
|
$ |
(6,196 |
) |
|
$ |
5,304 |
|
Developed technology |
|
|
9,710 |
|
|
|
(5,543 |
) |
|
|
4,167 |
|
|
|
8,900 |
|
|
|
(4,145 |
) |
|
|
4,755 |
|
Trademarks |
|
|
1,400 |
|
|
|
(560 |
) |
|
|
840 |
|
|
|
1,400 |
|
|
|
(350 |
) |
|
|
1,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
22,770 |
|
|
$ |
(13,916 |
) |
|
$ |
8,854 |
|
|
$ |
21,800 |
|
|
$ |
(10,691 |
) |
|
$ |
11,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets are amortized based upon the pattern of estimated economic use or on a
straight-line basis over their estimated useful lives, which range from 1 to 5 years. Amortization
expense related to intangibles was $1.1 million and $3.2 million for the three and nine month
periods ended September 30, 2008 and $1.2 million and $3.7 million for the three and nine month
periods ended September 30, 2007, respectively.
17
ART TECHNOLOGY GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company expects amortization expense for these intangible assets to be (in thousands):
|
|
|
|
|
Remainder of 2008 |
|
$ |
1,086 |
|
2009 |
|
|
3,704 |
|
2010 |
|
|
3,032 |
|
2011 |
|
|
1,032 |
|
|
|
|
|
Total |
|
$ |
8,854 |
|
|
|
|
|
(12) Litigation
As previously disclosed, in December 2001, a purported class action complaint was filed
against the Companys wholly owned subsidiary Primus Knowledge Solutions, Inc., two former officers
of Primus and the underwriters of Primus 1999 initial public offering. The complaints are similar
and allege violations of the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, primarily based on the allegation that the underwriters received undisclosed compensation in
connection with Primus initial public offering. The litigation has been consolidated in the United
States District Court for the Southern District of New York with claims against approximately 300
other companies that had initial public offerings during the same general time period. In February
2005, the court issued an opinion and order granting preliminary approval of a proposed settlement,
subject to certain non-material modifications. However in June 2007, the court terminated the
settlement process due to the parties inability to certify the settlement class. Plaintiffs
counsel are seeking certification of a narrower class of plaintiffs and filed amended complaints in
September 2007. The Company believes that it has meritorious defenses and intends to defend the
case vigorously. While the Company cannot predict the outcome of the litigation, it does not expect
any material adverse impact to its business, or the results of its operations, from this matter.
The Companys industry is characterized by the existence of a large number of patents,
trademarks and copyrights, and by increasingly frequent litigation based on allegations of
infringement or other violations of intellectual property rights. Some of the Companys competitors
in the e-commerce software and services market have filed or may file patent applications covering
aspects of their technology that they may claim the Companys technology infringes. Such
competitors could make claims of infringement against the Company with respect to our products and
technology. Additionally, third parties who are not actively engaged in providing e-commerce
products or services but who hold or acquire patents upon which they may allege the Companys
current or future products or services infringe may make claims of infringement against the Company
or the Companys customers. The Companys agreements with its customers typically require it to
indemnify them against claims of intellectual property infringement resulting from their use of the
Companys products and services. The Company periodically receives notices from customers regarding
patent license inquiries they have received which may or may not implicate the Companys indemnity
obligations, and certain of its customers are currently parties to litigation in which it is
alleged that the patent rights of others are infringed by the Companys products or services. Any
litigation over intellectual property rights, whether brought by the Company or by others, could
result in the expenditure of significant financial resources and the diversion of managements time
and efforts. In addition, litigation in which the Company or its customers are accused of
infringement might cause product shipment or service delivery delays, require the Company to
develop alternative technology or require the Company to enter into royalty or license agreements,
which might not be available on acceptable terms, or at all. ATG could incur substantial costs in
prosecuting or defending any intellectual property litigation. These claims, whether meritorious or
not, could be time-consuming, result in costly litigation, require expensive changes in the
Companys methods of doing business or could require the Company to enter into costly royalty or
licensing agreements, if available. As a result, these claims could harm the Companys business.
The ultimate outcome of any litigation is uncertain, and either unfavorable or favorable
outcomes could have a material negative impact on the Companys financial position, results of
operations, consolidated balance sheets and cash flows, due to defense costs, diversion of
management resources and other factors.
18
ART TECHNOLOGY GROUP, INC.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
This Managements Discussion and Analysis of Financial Condition and Results of Operations
should be read in conjunction with our condensed consolidated financial statements and the notes
contained in Item 1 of this Quarterly Report on Form 10-Q. The following discussion contains
forward-looking statements. The forward-looking statements do not include the potential impact of
any mergers, acquisitions, or divestitures of business combinations that may be announced after the
date hereof. For this purpose, any statement that is not a statement of historical fact should be
considered a forward-looking statement. We often use the words believes, anticipates, plans,
expects, intends and similar expressions to help identify forward-looking statements. There are
a number of important factors that could cause our actual results to differ materially from those
indicated or implied by forward-looking statements. Factors that could cause or contribute to such
differences include those referred to in Part II, Item 1A, under the heading Risk Factors, as
well as those discussed elsewhere in this quarterly report.
We develop and market a comprehensive suite of e-commerce software products, as well as
provide related services in conjunction with our products, including support and maintenance,
professional services, managed application hosting services, e-commerce optimization services for
enhancing online sales and support. We primarily derive revenue from the sale of software products
and related services. Our software licenses are priced based on the size of the customer
implementation. Our recurring services revenue is comprised of managed application hosting
services, e-commerce optimization services, and support and maintenance. Managed application
hosting revenue is recognized monthly as the services are provided based on a per transaction, per
CPU or percent of customers revenue basis. e-commerce optimization services are priced on a per
transaction basis and recognized monthly as the services are provided. Support and maintenance
arrangements are priced based on the level of support services provided as a percent of net license
fees per annum. Under support and maintenance services, customers are generally entitled to receive
software upgrades and updates, maintenance releases and technical support. Professional and
educational service revenue includes implementation, technical consulting and educational training.
We bill professional service fees primarily on a time and materials basis. Education services are
billed as services are provided.
Shift to increasing ratably recognized revenue
Before 2007, most of our revenue from arrangements involving the sale of our software was
derived from perpetual software licenses and in most circumstances was recognized at the time the
license agreement was executed and delivery of the software occurred provided that the other
criteria of revenue recognition was met. Beginning in the first quarter of 2007, some of our
perpetual software licenses also included the sale of our managed application hosting services or
e-commerce optimization services. As a result of applying the requirements of U.S. generally
accepted accounting principles (GAAP) to our evolving business model, the revenue from an
increasing number of our arrangements is being recognized on a ratable basis over the estimated
term of the contract or arrangement, commencing with the go-live date for providing the managed
application hosting services or e-commerce optimization services.
The addition of e-commerce optimization services and managed application hosting services
solution offerings introduced new products in our portfolio for which we do not have
vendor-specific objective evidence (or VSOE) of fair value. As a result, when we sell e-commerce
optimization services and managed application hosting services in conjunction with e-commerce
software, we defer all up-front fees, such as those for licenses, support and maintenance and
professional services, received prior to the delivery of the managed application hosting services
or e-commerce optimization services. We recognize these fees as revenue ratably over either the
term of the contract or estimated life of the arrangement depending on the specific facts of the
arrangement, commencing with the go-live date for providing the managed application hosting
services or e-commerce optimization services. In addition, when professional services revenue is
deferred in connection with these arrangements and other instances in which there are undelivered
elements to a transaction for which we do not have VSOE of fair value, we defer the direct costs
related to performing the professional services prior to delivery of the element related to these
services. These amounts are recognized ratably to cost of revenue in the same manner as the related
revenue.
19
ART TECHNOLOGY GROUP, INC.
In the longer term, we expect this transition to result in greater stability and
predictability in our revenues, and a pattern of growth in our total GAAP revenue that is more
reflective of our sales cycle. In the interim, however, the effect of this shift in our business
model has been to adversely affect our near term revenue growth and earnings.
Key measures that we use to evaluate our performance:
The change to our business model has required our management to re-consider the measures that
we use to evaluate our business results. In addition to the traditional measures of financial
performance that are reflected in our results of operations determined in accordance with GAAP, we
also monitor certain non-GAAP financial measures of the performance of our business. A non-GAAP
financial measure is a numerical measure of a companys historical or future financial performance
that excludes amounts that are included in the most directly comparable measure calculated and
presented in the GAAP statement of operations. Among the GAAP and non-GAAP measures that we believe
are most important in evaluating the performance of our business are the following:
|
|
|
We use product license bookings, a non-GAAP financial measure, as an important measure
of growth in demand for our ATG e-commerce platform and the success of our sales and
marketing efforts. We define product license bookings as product license revenue as
reported on our statement of operations plus the contract value of licenses executed and
whose recognition was deferred in the current period less revenue that was recognized from
license contracts executed and deferred in prior periods. We believe that this measure
provides us with an indication of the amount of new software license business that our
direct sales team has added in the period. Product license revenue associated with a
particular transaction may be deferred for reasons other than the presence of a managed
application hosting or e-commerce optimization services arrangement, such as the presence
of credit risk or other contractual terms that, under GAAP, require us to defer the
recognition of revenue. The deferred revenue for such a transaction may be recognized in a
single future period when the conditions that originally required deferral have been
resolved, rather than ratably. We include all additions to deferred product license revenue
in our calculation of product license bookings. |
|
|
|
|
We use cash flow from operations as an indicator of the success of the business.
Because a significant portion of our revenue is deferred in the near term, our net income
may be significantly different from the cash that we generate from operations. Cash flow
from operations is typically higher in the quarters following our seasonally stronger
product license bookings quarters, which have historically been the fourth and second
quarters. |
|
|
|
|
We use recurring services revenue, as reported in our statement of operations, to
evaluate the success of our strategy to deliver site-independent online services and the
growth of our ratable revenue sources. We expect that recurring services revenue will
continue to increase as a percentage of total revenue in future periods. Recurring services
revenue includes e-commerce optimization services, application hosting services and support
and maintenance related to ATG e-commerce platform sales. |
|
|
|
|
We use revenue and gross margins on our various lines of business to measure our
success at meeting cash and non-cash cost and expense targets in relation to revenue
earned. |
|
|
|
|
We use days sales outstanding (DSO), calculated by dividing accounts receivable in
the period by revenue and multiplying the result by the number of days in the period. We
also use a modified DSO that adjusts our revenue by the change in deferred revenue during
the period to provide us with a more accurate picture of the strength of our accounts
receivables and related collection efforts. The percentage of accounts receivable that are
less than 60 days old is an important factor that our management uses to understand the
strength of our accounts receivable portfolio. This measure is important because a
disproportionate percentage of our product license bookings often occurs late in the
quarter, which has the effect of increasing our DSO and modified DSO. |
20
ART TECHNOLOGY GROUP, INC.
Trends in On-Line Sales and our Business
Set forth below is a discussion of recent developments in our industry that we believe offer
us significant opportunities, present us with significant challenges, and have the potential to
significantly influence our results of operations.
Trend in on-line sales. The growth of e-commerce as an important sales channel is the
principal driver for demand for our products and services. According to Forrester Research and
Gartner, e-commerce sales grew 21% to $175 billion in 2007 and they are projected to grow to $335
billion by 2012. Online holiday sales grew 19% in 2007, five times the rate of growth for offline
stores. As online sales continue to outpace store growth and the importance of this channel grows,
we believe that retailers require more sophisticated e-commerce optimization services in order to
stay competitive on-line and increase conversion rates, order size and revenue.
E-commerce replatforming. Enterprises periodically upgrade or replace the network and
enterprise applications software and the related hardware systems that they use to run their
e-commerce operations in order to take advantage of advances in computing power, system
architectures and enterprise software functionality that enable them to increase the capabilities
of their e-commerce systems while simplifying operation and maintenance of these systems and
reducing their cost of ownership. In the e-commerce software industry, we refer to these major
system upgrades or replacements as replatforming. We believe that on average, customers in our
market replatform or refresh their e-commerce software approximately every five years. In large
part due to the increased significance of the on-line sales channel, industry analysts believe that
e-commerce is currently in a period of increased replatforming activity, with increased corporate
spending on e-commerce optimization services across many of our markets.
Emergence of the on demand model of Software as a Service. An important trend throughout
the enterprise software industry in recent years has been the emergence of Software as a Service,
or SaaS. SaaS is a software delivery model whereby a software vendor that has developed a software
application hosts and operates it for use by its customers over the Internet. The emergence of SaaS
has been driven by customers desire to reduce the costs of owning and operating critical
applications software, while shifting the risks and burdens associated with operating and
maintaining the software to the software vendor, enabling the customer to focus its resources on
its core business.
Rapidly evolving and increasingly complex customer requirements. The market for e-commerce is
constantly and rapidly evolving, as we and our competitors introduce new and enhanced products,
retire older ones, and react to changes in Internet-related technology and customer demands. The
market for e-commerce has seen diminishing product differentiators, increasing product
commoditization and evolving industry standards. To succeed, we need to enhance our current
products and develop new products on a timely basis to keep pace with market needs, satisfy the
increasingly sophisticated requirements of customers and leverage strategic alliances with third
parties in the e-commerce field who have complementary products.
International expansion. We have seen an increase in sales and pipeline growth in Europe and
India. We seek to invest resources into further developing our reach internationally. In support of
this initiative we have entered into partnership agreements abroad that will support our continued
growth. As the international market opportunity continues to develop we will adjust our strategy.
Competitive trend. The market for online sales, marketing and customer service software is
intensely competitive, subject to rapid technological change, and significantly affected by new
product introductions by large competitors with significantly greater resources and installed
customer bases. We expect competition to persist and intensify in the future.
Recent Events
In early
October 2008, we internally announced proactive steps to more efficiently align our cost structure
with the uncertainties around fourth quarter IT spending resulting from changes to the
macroeconomic environment that occurred during the third quarter of
2008. We have continued those
steps into the fourth quarter. We expect the initiative will have the effect of lowering
operating expenses for the foreseeable future but will not impact our ability to meet our revenue
guidance as previously communicated. This initiative includes a "hiring pause" where all
additional and replacement staffing will be evaluated on a selective basis, prioritized by direct
revenue generation and critical function backfill. The project also limits other spending that is
not directly related to customer, partner and investor activities.
21
ART TECHNOLOGY GROUP, INC.
Critical Accounting Policies and Estimates
This managements discussion and analysis of financial condition and results of operations
discusses our consolidated financial statements, which have been prepared in accordance with United
States generally accepted accounting principles.
The preparation of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its
estimates and judgments, including those related to revenue recognition, deferral of costs, the
allowance for accounts receivable, research and development costs, the impairment of long-lived
assets and goodwill, income taxes and assumptions for stock-based compensation. Management bases
its estimates and judgments on historical experience, known trends or events and various other
factors that are believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We define our critical accounting policies as those that require us to make subjective
estimates about matters that are uncertain and are likely to have a material impact on our
financial condition and results of operations or that concern the specific manner in which we apply
GAAP. Our estimates are based upon assumptions and judgments about matters that are highly
uncertain at the time the accounting estimate is made and applied and require us to assess a range
of potential outcomes.
For a description of the critical accounting policies that we consider to be both those most
important to the portrayal of our financial condition and those that require the most subjective
judgment, see our Annual report on Form 10-K for the year ended December 31, 2007, under the
heading Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies and Estimates. As of the date of this report there has been no
material change in any of the critical accounting policies and estimates described in that Annual
Report on Form 10-K.
22
ART TECHNOLOGY GROUP, INC.
Results of Operations
The following table sets forth statement of operations data as percentages of total revenue for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
September 30, |
|
|
|
|
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses |
|
|
26 |
% |
|
|
22 |
% |
|
|
27 |
% |
|
|
21 |
% |
|
|
|
|
Recurring services |
|
|
58 |
|
|
|
54 |
|
|
|
57 |
|
|
|
57 |
|
|
|
|
|
Professional and education services |
|
|
16 |
|
|
|
24 |
|
|
|
16 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
|
|
Cost of Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses |
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
Recurring services |
|
|
21 |
|
|
|
17 |
|
|
|
21 |
|
|
|
17 |
|
|
|
|
|
Professional and education services |
|
|
16 |
|
|
|
21 |
|
|
|
17 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
38 |
|
|
|
40 |
|
|
|
39 |
|
|
|
40 |
|
|
|
|
|
Gross profit |
|
|
62 |
|
|
|
60 |
|
|
|
61 |
|
|
|
60 |
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
19 |
|
|
|
18 |
|
|
|
18 |
|
|
|
19 |
|
|
|
|
|
Sales and marketing |
|
|
30 |
|
|
|
33 |
|
|
|
31 |
|
|
|
34 |
|
|
|
|
|
General and administrative |
|
|
12 |
|
|
|
12 |
|
|
|
12 |
|
|
|
13 |
|
|
|
|
|
Restructuring |
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
61 |
|
|
|
64 |
|
|
|
61 |
|
|
|
66 |
|
|
|
|
|
Income (loss) from operations |
|
|
1 |
|
|
|
(4 |
) |
|
|
0 |
|
|
|
(6 |
) |
|
|
|
|
Interest and other income, net |
|
|
1 |
|
|
|
2 |
|
|
|
0 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes |
|
|
2 |
|
|
|
(2 |
) |
|
|
0 |
|
|
|
(4 |
) |
|
|
|
|
Provision (benefit) for income taxes |
|
|
(0 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
2 |
% |
|
|
(2 |
%) |
|
|
0 |
% |
|
|
(4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth, for the periods indicated, the cost of product license revenue as a
percentage of product license revenue and the cost of services revenue as a percentage of services
revenue and the related gross margins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Cost of product license revenue |
|
|
5 |
% |
|
|
7 |
% |
|
|
4 |
% |
|
|
8 |
% |
Gross margin on product license revenue |
|
|
95 |
% |
|
|
93 |
% |
|
|
96 |
% |
|
|
92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of recurring services revenue |
|
|
37 |
% |
|
|
32 |
% |
|
|
38 |
% |
|
|
30 |
% |
Gross margin on recurring services revenue |
|
|
63 |
% |
|
|
68 |
% |
|
|
62 |
% |
|
|
70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of professional and education services |
|
|
97 |
% |
|
|
88 |
% |
|
|
101 |
% |
|
|
95 |
% |
Gross margin on professional and education
services |
|
|
3 |
% |
|
|
12 |
% |
|
|
(1 |
)% |
|
|
5 |
% |
23
ART TECHNOLOGY GROUP, INC.
Product license bookings
Product license bookings is a non-GAAP term that we define as product license revenue as
reported in our statement of operations plus the net change in deferred product license revenue
during the period. We believe that this measure provides us with an indication of the amount of new
business that our direct sales team has added in the period. The following table summarizes our
product license bookings for the three and nine months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Product license bookings |
|
$ |
9,485 |
|
|
$ |
9,374 |
|
|
$ |
36,626 |
|
|
$ |
30,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license bookings deferred |
|
|
(4,078 |
) |
|
|
(2,146 |
) |
|
|
(19,441 |
) |
|
|
(10,495 |
) |
Product license deferred revenue recognized |
|
|
5,357 |
|
|
|
645 |
|
|
|
15,136 |
|
|
|
1,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product license revenue |
|
$ |
10,764 |
|
|
$ |
7,873 |
|
|
$ |
32,321 |
|
|
$ |
20,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
license bookings increased $0.1 million to $9.5 million in the three month periods ended September
30, 2008 from $9.4 million for the three months ended September 30, 2007. The lower than expected
increase reflects the delay in the completion of the sales cycle on a few sales opportunities
resulting from general concerns related to the global credit crisis that occurred during the end
of the third quarter 2008. Product license bookings increased $6.2 million or 20% to $36.6
million in the nine month periods ended September 30, 2008 from $30.4 million for the nine months
ended September 30, 2007, respectively. This increase reflects growth in the e-commerce market
and the success of our sales and marketing initiatives partially offset by the impact of the
global credit crisis during the third quarter of 2008.
Product license bookings deferred were 43% and 53% of our total product license bookings for
the three and nine months ended September 30, 2008, respectively, compared to 23% and 35% for the
three and nine months ended September 30, 2007, due to the inclusion of e-commerce optimization
services, application hosting and other elements in our contracts. Deferred revenue will be
recognized in future periods when delivery of the service occurs or as contractual requirements are
met. During the three and nine months ended September 30, 2008
we recognized previously deferred revenue of $5.4
million and $15.1 million, respectively, compared to $0.6 million and
$1.1 million for the three and nine months ended September 30, 2007.
Product license deferred revenue recognized of $5.4 million and $15.1 million in the three and
nine months ended September 30, 2008 included approximately $2.4 million and $5.2 million,
respectively, that was from ratably recognized revenue due to the
change in our business model. The remainder related to resolution of contractual elements that precluded revenue recognition in
prior periods.
We expect full year 2008 product license bookings to increase approximately 10% to 20% from
2007.
24
ART TECHNOLOGY GROUP, INC.
Three and Nine Months ended September 30, 2008 and 2007
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(in thousands) |
Total revenue |
|
$ |
40,794 |
|
|
$ |
35,886 |
|
|
$ |
119,244 |
|
|
$ |
97,734 |
|
Total revenue increased $4.9 million or 14% to $40.8 million for the three months ended
September 30, 2008 from $35.9 million for the three months ended September 30, 2007. Total revenue
increased 22% to $119.2 million for the nine months ended September 30, 2008 from $97.7 million for
the nine months ended September 30, 2007. Revenue is derived from (1) perpetual software licenses,
(2) recurring services, which is comprised of support and maintenance services, application hosting
services, and e-commerce optimization services, and (3) professional and education services.
The increase in revenue for the three month period ended September 30, 2008 is primarily
attributable to growth in recurring services revenue and product license revenue. Recurring
services revenue increased $4.1 million, or 21%, for the three months ended September 30, 2008 and
product license revenue grew $2.9 million, or 37%, for the three months ended September 30, 2008.
The increase in revenue for the nine month period ended September 30, 2008 is primarily
attributable to growth in the recurring services revenue and product license revenue. Recurring
services revenue increased $12.0 million, or 22%, for the nine months ended September 30, 2008.
Product license revenue grew $11.3 million, or 54%, for the nine months ended September 30, 2008.
Revenue generated from international customers declined to $10.9 million, or 28%, of total
revenues, and $34.2 million, or 29% of total revenue, for the three and nine months ended September
30, 2008, from $13.8 million, or 39% of total revenues, and $30.7 million, or 31% of total revenue,
in the comparable prior year periods.
No customer accounted for 10% or more of total revenue in the three and nine-month periods
ended September 30, 2008 and 2007.
We expect full year 2008 revenues in the range of $159 million to $162 million.
Product license revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
Product license revenue |
|
$ |
10,764 |
|
|
$ |
7,873 |
|
|
$ |
32,321 |
|
|
$ |
20,997 |
|
As a percent of total revenue |
|
|
26 |
% |
|
|
22 |
% |
|
|
27 |
% |
|
|
21 |
% |
Product license revenue increased 37% to $10.8 million for the three months ended September
30, 2008 from $7.9 million for the three months ended September 30, 2007. Product license revenue
increased 54% to $32.3 million for the nine months ended September 30, 2008 from $21.0 million for
the nine months ended September 30, 2007. Product license revenue consists of the sale of perpetual
license agreements less the deferred amounts that will be recognized on a ratable basis in the
future, plus amounts that have been recognized in the current period from arrangements that were
previously deferred.
The increase in product license revenue during the three months ended September 30, 2008 as
compared to 2007 is attributable to an increase of $4.7 million in recognition of previously
deferred product license revenue and a $0.1 million increase in product license bookings. These
increases were partially offset by an increase of $1.9 million in product license bookings
deferred.
25
ART TECHNOLOGY GROUP, INC.
The increase in product license revenue during the nine months ended September 30, 2008 as
compared to 2007 is attributable to a 21% or $6.3 million increase in product license bookings and
a $14.0 million increase in recognition of previously deferred product license revenue. These
increases were partially offset by an $8.9 million increase in product license bookings deferred.
The product license revenue generated from international customers was $3.0 million and $10.9
million for the three and nine months ended September 30, 2008, compared to $6.1 million and $8.3
million for the three and nine months ended September 30, 2007.
We expect fourth quarter product license revenues to be approximately $9 million to $11
million.
Recurring services revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
|
|
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
Support and maintenance |
|
$ |
11,504 |
|
|
$ |
10,665 |
|
|
$ |
34,107 |
|
|
$ |
31,163 |
|
|
|
|
|
e-Commerce optimization services
and managed application hosting
services |
|
|
11,942 |
|
|
|
8,681 |
|
|
|
33,228 |
|
|
|
24,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring services revenue |
|
$ |
23,446 |
|
|
$ |
19,346 |
|
|
$ |
67,335 |
|
|
$ |
55,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenue |
|
|
58 |
% |
|
|
54 |
% |
|
|
57 |
% |
|
|
57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our recurring services revenue increased 21% to $23.4 million for the three months ended
September 30, 2008 from $19.3 million for the three months ended September 30, 2007, as follows:
|
|
|
Support and maintenance revenue increased 7.8% to $11.5 million for the three months
ended September 30, 2008 from $10.7 million for the corresponding period of 2007 driven by
growth in the installed base of our products. Support and maintenance revenue increased 9%
to $34.1 million for the nine months ended September 30, 2008 from $31.2 million for the
corresponding period of 2007 driven by the growth in the installed base of our products. |
|
|
|
|
e-Commerce optimization services and managed application hosting services revenue
increased 38% to $11.9 million in the three months ended September 30, 2008 from $8.7
million in the corresponding period of 2007. e-Commerce optimization services and managed
application hosting services revenue increased 37% to $33.2 million in the nine months
ended September 30, 2008 from $24.2 million in the corresponding period of 2007. The
increased revenue in the three and nine month periods of 2008 is driven by growth in the
number of customers utilizing our e-commerce optimization services and increased
utilization by our existing customer base. Revenue generated by the commercial
personalization services technology acquired in the CleverSet transaction is included in
this e-commerce optimization services revenue. |
We expect fourth quarter recurring services revenues to be in the range of $24 million to $25
million.
Professional and education services revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
Professional and education services revenue |
|
$ |
6,584 |
|
|
$ |
8,667 |
|
|
$ |
19,588 |
|
|
$ |
21,402 |
|
As a percent of total revenue |
|
|
16 |
% |
|
|
24 |
% |
|
|
16 |
% |
|
|
22 |
% |
Professional and education services revenue decreased 24% to $6.6 million for the three months
ended September 30, 2008 from $8.7 million for the three months ended September 30, 2007, and
declined to 16% percent of total revenue in 2008 from 24% in 2007. Professional and education
services revenue decreased 8% to $19.6 million for the nine months ended September 30, 2008 from
$21.4 million for the nine months ended September 30, 2007. Professional services revenue consists
primarily of revenue from consulting and implementation services, which typically are performed in
the quarters closely following the execution of a product license transaction.
26
ART TECHNOLOGY GROUP, INC.
The decline in professional and education services revenue for the three and nine months ended
September 30, 2008 is primarily due to our strategy of shifting professional services engagements
to our partner network. Included in professional and education services revenue for the three and
nine month periods ended September 30, 2008 was $0.5 million and $1.3 million of revenue related to
government funded research business acquired with CleverSet.
Based on our strategy to expand our partner ecosystem in order to leverage our partners
global reach and resources, we are increasingly focusing on testing and certifying partners rather
than continuing to grow our professional services business. For this reason, we expect fourth
quarter professional services revenue to be in the range of $6 million to $7 million.
Cost of product license revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
Cost of product license revenue |
|
$ |
539 |
|
|
$ |
557 |
|
|
$ |
1,445 |
|
|
$ |
1,646 |
|
As a percent of license revenue |
|
|
5 |
% |
|
|
7 |
% |
|
|
4 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin on product license revenue |
|
$ |
10,225 |
|
|
$ |
7,316 |
|
|
$ |
30,876 |
|
|
$ |
19,351 |
|
As a percent of license revenue |
|
|
95 |
% |
|
|
93 |
% |
|
|
96 |
% |
|
|
92 |
% |
Cost of product license revenue includes salary, benefits and stock-based compensation costs
of fulfillment and engineering staff dedicated to maintenance of products that are in general
release, the amortization of licenses purchased in support of and used in our products, royalties
paid to vendors whose technology is incorporated into our products and amortization expense related
to acquired technology.
We
expect full year 2008 gross margin on product license revenue to
approximately be 95% to
96% of product license revenue.
Cost of recurring services revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
Cost of recurring services revenue |
|
$ |
8,611 |
|
|
$ |
6,165 |
|
|
$ |
25,458 |
|
|
$ |
16,687 |
|
As a percent of recurring services revenue |
|
|
37 |
% |
|
|
32 |
% |
|
|
38 |
% |
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin on recurring services revenue |
|
$ |
14,835 |
|
|
$ |
13,181 |
|
|
$ |
41,877 |
|
|
$ |
38,648 |
|
As a percent of recurring services revenue |
|
|
63 |
% |
|
|
68 |
% |
|
|
62 |
% |
|
|
70 |
% |
Cost of recurring services revenues includes salary, benefits, and stock-based compensation
and other costs for recurring services support staff, costs associated with the hosting centers,
third-party contractors, amortization of technology acquired in connection with the CleverSet and
eStara acquisitions, and royalties. When we perform professional consulting and implementation
services in connection with managed application hosting arrangements, and other arrangements in
which professional services revenue is deferred, we generally defer the direct costs incurred prior
to delivery of the element related to the performance of these professional services. Deferred
costs are amortized to cost of revenue ratably over the term or the estimated life of the
arrangement once the services commence. We deferred, on a net basis, no
direct costs for the three months ended September 30, 2008 and $0.4 million of direct
costs for the nine months ended September 30, 2008.
27
ART TECHNOLOGY GROUP, INC.
Cost of recurring services revenue increased 40% to $8.6 million for the three months ended
September 30, 2008 from $6.2 million for the three months ended September 30, 2007. Gross margin on
recurring services revenue was 63%, or $14.8 million for the three months ended September 30, 2008
compared to 68%, or $13.2 million for the three months ended September 30, 2007. Cost of recurring
services revenue increased 53% to $25.5 million for the nine months ended September 30, 2008 from
$16.7 million for the nine months ended September 30, 2007. Gross margin on recurring services was
62% or $41.9 million for the nine months ended September 30, 2008 compared to 70% or $38.6 million
for the nine months ended September 30, 2007.
The increase in cost of recurring services and the resulting decline in gross margin
percentage on recurring services for the three month period ended September 30, 2008 was due to a
$0.6 million increase in telecommunications costs in our e-commerce optimization services business
correlating with increased call traffic resulting from growth in customer utilization of these
services, a $0.2 million increase in labor related costs from additional investment in our
application hosting services infrastructure, a net $0.7 million increase in recognition of
previously deferred implementation costs and $0.3 million in depreciation expense related to fixed
assets acquired to support growth in the business and the acquisition of CleverSet.
The increase in cost of recurring services and the resulting decline in gross margin
percentage on recurring services for the nine month period ended September 30, 2008 was due to a
$3.1 million increase in telecommunications costs related to e-commerce optimization services
business correlating with increased call traffic resulting from growth in customer utilization of
these services, $2.5 million increase in labor related costs from additional investment in our
application hosting services infrastructure, a $1.1 million increase in recognition of costs
previously deferred, as a result of termination of customer hosting arrangements, and $0.9 million
in depreciation expense resulting from additional hardware to support the on demand environment.
We expect full year
2008 gross margin on recurring services revenue to be approximately 61% to
63%.
Cost of professional and education services revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
Cost of
professional and
education services
revenue |
|
$ |
6,393 |
|
|
$ |
7,587 |
|
|
$ |
19,802 |
|
|
$ |
20,356 |
|
As a percent of
professional and
education services
revenue |
|
|
97 |
% |
|
|
88 |
% |
|
|
101 |
% |
|
|
95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin on
professional and
education services
revenue |
|
$ |
191 |
|
|
$ |
1,080 |
|
|
$ |
(214 |
) |
|
$ |
1,046 |
|
As a percent of
professional and
education services
revenue |
|
|
3 |
% |
|
|
12 |
% |
|
|
(1 |
)% |
|
|
5 |
% |
Cost of professional and education services revenues includes salary, benefits, and
stock-based compensation and other costs for professional services and technical support staff and
third-party contractors.
Cost of professional and education services revenue decreased 16% to $6.4 million for the
three months ended September 30, 2008 from $7.6 million for the three months ended September 30,
2007. The decrease in cost of professional and education services for the three months ended
September 30, 2008 was driven by a $2.5 million decrease in labor related costs for professional
services. This decrease was attributable to a reduction in the use of contract labor in the delivery of our professional
services, resulting from the successful execution of our strategy to develop our partner networks.
The decreases in expenses were partially offset by $0.9 million decrease in the deferral of costs
compared with the 2007 period and the inclusion of $0.6 million in CleverSet expenses.
Cost of professional and education services decreased 3% to $19.8 million for the nine months
ended September 30, 2008 from $20.4 million for the nine months ended September 30, 2007. The
decrease in cost of professional and education services for the nine month ended September 30, 2008
was driven by a $2.9 million decrease in labor related costs for professional services due to a
reduction in the use of contract labor in the delivery of our professional services resulting from
the successful execution of our strategy to develop our partner networks. In addition, travel
costs declined $0.2 million from the comparable prior year period. The decreases in expenses were
partially offset by the inclusion of CleverSet expenses of $1.3 million and a $1.5 million
decrease in the deferral of costs compared with the 2007 period.
28
ART TECHNOLOGY GROUP, INC.
We expect full year 2008 gross margin on professional and educational services revenue to be
approximately zero to 3%.
Research and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
Research and development expenses |
|
$ |
7,660 |
|
|
$ |
6,632 |
|
|
$ |
22,054 |
|
|
$ |
18,683 |
|
As a percent of total revenue |
|
|
19 |
% |
|
|
18 |
% |
|
|
18 |
% |
|
|
19 |
% |
Research and development expenses consist primarily of salary, benefits, and stock-based
compensation costs to support product development. To date, all of our software development costs
have been expensed as research and development in the period incurred.
Research and development expenses increased 16% to $7.7 million for the three months ended
September 30, 2008 from $6.6 million for the three months ended September 30, 2007 and increased as
a percentage of revenue to 19% from 18%. Research and development expenses increased 18% to $22.1
million for the nine months ended September 30, 2008 from $18.7 million for the nine months ended
September 30, 2007 and decreased as percentage of revenue to 18% from 19%. The increase in research
and development spending for the three months ended September 30, 2008 was primarily attributable
to an increase of $0.5 million in labor related costs, $0.1 million increase in amortization
expense for intangible assets, $0.1 million increase in stock-based compensation and $0.1 million
increase in depreciation expense all of which related to the CleverSet acquisition. The increase in
research and development spending for the nine months ended September 30, 2008 was primarily
attributable to an increase of $2.5 million in labor and related costs; additionally, stock-based
compensation expense increased $0.3 million, recruiting fees increased $0.2 million and
amortization expense increased $0.2 million. These increases were attributable to the acquisition
of CleverSet and investment in additional resources to support e-commerce optimization services.
We expect full year 2008 research and development expenses to be approximately 19% of revenue.
Sales and marketing expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
Sales and marketing expenses |
|
$ |
12,282 |
|
|
$ |
11,697 |
|
|
$ |
36,975 |
|
|
$ |
33,014 |
|
As a percent of total revenue |
|
|
30 |
% |
|
|
33 |
% |
|
|
31 |
% |
|
|
34 |
% |
Sales and marketing expenses consist primarily of salaries, commissions, benefits, and
stock-based compensation and other related costs for sales and marketing personnel, travel, public
relations and marketing materials and events.
Sales and marketing expenses increased 5% to $12.3 million for the three months ended
September 30, 2008 from $11.7 million for the three months ended September 30, 2007, and declined
as a percentage of total revenue to 30% from 33%. Sales and marketing expense increased 12% to $37
million for the nine months ended September 30, 2008 from $33 million for the nine months ended
September 30, 2007 and decreased as a percentage of revenue to 31% from 34%. The increase in
spending for the three months consisted of labor related costs of $0.5 million as a result of
hiring additional sales personnel, net of a $0.7 million decrease in bonus and commission due to
flat product license bookings compared with the 2007 period, and a $0.1 increase in stock-based
compensation The increase in spending for the nine months consisted of labor related cost of $1.8
million due to hiring additional sales personnel, which includes a $0.4 million increase in bonus
and commission driven by a 21% increase in product license bookings, $0.6 increase in stock
compensation, and higher travel costs of $0.4 million due to rising costs in this part of the
economy.
We expect full year 2008 sales and marketing expenses to be approximately 31% of revenue.
29
ART TECHNOLOGY GROUP, INC.
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
General and administrative expenses |
|
$ |
4,890 |
|
|
$ |
4,489 |
|
|
$ |
14,082 |
|
|
$ |
13,740 |
|
As a percent of total revenue |
|
|
12 |
% |
|
|
13 |
% |
|
|
12 |
% |
|
|
13 |
% |
General and administrative expenses consist primarily of salaries, benefits, and stock-based
compensation and other related costs for internal systems, finance, human resources, legal and
executive related functions.
General and administrative expenses increased 9% to $4.9 million for the three months ended
September 30, 2008 from $4.5 million for the three months ended September 30, 2007, and decreased
as a percentage of total revenue to 12% from 13%. General and administrative expenses increased 3%
to $14.1 million for the nine months ended September 30, 2008 from $13.7 million for the nine
months ended September 30, 2007 and decreased as a percentage of
revenue to 12% from 13%.
The increase in general and administrative expenses for the three months ended September 30,
2008 of $0.4 million was the result of an increase in tax planning expense and outside service fees
of $0.3 million and stock-based compensation of $0.1 million. The increase in general and
administrative expenses for the nine months ended September 30, 2008 of $0.4 million was the result
of an increase in legal, audit and tax preparation of approximately $1.0 million and stock based
compensation of $0.5 million. These increases in general and administrative expenses were
partially offset by a decrease of $1.0 million in outside services and contract labor.
We expect full year 2008
general and administrative expenses to be approximately 11% to 12% of
revenue.
Stock-based Compensation Expense
We use the straight-line attribution method to recognize stock-based compensation expense for
share-based payments unless there are performance-based criteria, in which case we use the
accelerated method. Compensation cost is calculated on the date of grant using the fair value of
the options as determined by the Black-Scholes valuation model, or fair value of our common stock
for issuances of restricted stock and restricted stock units. Stock-based compensation expense for
the three months ended September 30, 2008 and 2007 was $2.0 million and $1.6 million, respectively.
Stock-based compensation expense for the nine months ended September 30, 2008 and 2007 was $5.8
million and $4.1 million, respectively.
As of September 30,
2008, the total compensation cost related to unvested awards not yet recognized
in the statement of operations is approximately $18.4 million, which will be recognized over a
weighted average period of 2.9 years.
Interest and Other Income, Net
Interest and other income net decreased to $0.2 million for the three months ended September
30, 2008 from $0.6 million for the three months ended September 30, 2007. Interest and other income
net decreased to $1.1 million for the nine months ended September 30, 2008 from $1.5 million for
the nine months ended September 30, 2007. The decrease in the three and nine months ended September
30, 2008 was primarily due to a decrease in gains on foreign currency transactions and lower
interest income during the period driven by the use of marketable securities to fund the CleverSet
acquisition and lower interest rates.
30
ART TECHNOLOGY GROUP, INC.
Provision for Income Taxes
For the three and nine months ended September 30 2008, we recorded income tax (benefit) and
provision of ($0.1) million and $0.2 million, respectively. The current period provision is offset
by a tax benefit of $0.2 million recorded during the quarter for refundable U.S. research and
development tax credits pursuant to recently enacted legislation. The provision primarily relates
to earnings in certain of our foreign subsidiaries as well as interest and penalties related to
some of our tax positions. We recorded tax provisions of $0.1 million and $0.2 million for the
three and nine months ended September 30, 2007.
As a result of historical net operating losses incurred, and after evaluating our anticipated
performance over our normal planning horizon, we have provided a full valuation allowance against
our net operating loss carryforwards, research and development credit carryforwards and other net
deferred tax assets. The primary differences between book and tax income for 2008 are the
amortization of capitalized research and development expenses and payments on lease restructuring
reserves, offset by deferred revenue and stock-based compensation expenses and the non-deductible
book amortization of certain purchased intangibles.
Liquidity and Capital Resources
Our capital requirements relate primarily to facilities, employee infrastructure and working
capital requirements. Our primary sources of liquidity at September 30, 2008 are our cash, cash
equivalents, and short and long-term marketable securities of $56.6 million, excluding $2.1 million
of restricted cash.
Cash provided by operating activities was $22.5 million for the nine months ended September
30, 2008.
|
|
|
Net income of $0.3 million included non-cash expenses for depreciation and amortization
of $6.5 million and stock-based compensation expense of $5.8 million. |
|
|
|
|
Deferred revenue increased $6.4 million during the period. We invoice customers as
licenses and services are delivered and pursue collection of these invoices under customary
business practices. Accordingly, the invoices that generated the deferred revenue balance
at September 30, 2008 were subject to our collection process and, to the extent collected,
are in our cash flow from operations. |
|
|
|
|
Prepaid expenses and other current assets increased $0.8 million due to payments for
support and maintenance contracts on internally utilized software, foreign sales tax
payments which are recoverable and outside services. |
|
|
|
|
Cash flows from accounts receivable increased $4.8 million in 2008, due to improved
collection of outstanding accounts receivable, which resulted in a decline in days sales
outstanding to 79 days at September 30, 2008 compared to 93 days at December 31, 2007. The
improved collections of receivables more than offset the deferral of revenue caused by
changes in our business model. |
|
|
|
|
Accrued expenses and other liabilities increased $0.2 million in 2008 primarily due to
increases in accrued salaries, payroll withholdings, value-added taxes, other taxes
partially offset by a decrease in accrued incentives. |
Net cash used in investing activities for the nine months ended September 30, 2008 was $12.0
million, which consisted of $5.6 million of capital expenditures, primarily computer equipment and
software for our managed application hosting services business, $2.1 million in purchases of
certificates of deposit to collateralize letters of credit, net payments of $9.5 million for the
CleverSet acquisition and $0.6 million for payments to eStara shareholders for contingent
consideration, partially offset by $5.3 million in net sales and maturities of marketable
securities.
31
ART TECHNOLOGY GROUP, INC.
Net cash provided by financing activities was $0.4 million for the nine months ended September
30, 2008. Financing activities consisted primarily of the $1.5 million repurchase of our common
stock and $0.5 million in payments of employee restricted stock tax withholdings, partially offset
by $2.4 million in proceeds from exercised stock options and the employee stock purchase plan.
On April 19, 2007 our Board of Directors authorized a stock repurchase program providing for
repurchases of our outstanding common stock of up to $20.0 million, in the open market or in
privately negotiated transactions, at times and prices considered appropriate depending on
prevailing market conditions. During the nine months ended September 30, 2008, we repurchased
422,182 shares of our common stock at a cost of $1.5 million. Under the program to date, we
repurchased 1,409,142 shares of our common stock at a cost of $4.4 million. We have authorization
to expend an additional $15.6 million under this program as of September 30, 2008.
We believe that our balance of $56.6 million in cash, cash equivalents and marketable
securities, excluding $2.1 million of restricted cash at September 30, 2008, along with other
working capital and cash expected to be generated by operations, will allow us to meet our
liquidity requirements over at least the next twelve months and for the foreseeable future.
However, our actual cash requirements will depend on many factors, including particularly, overall
economic conditions both domestically and abroad. We may find it necessary or advisable to seek
additional external funds through public or private securities offerings, strategic alliances or
other financing sources. There can be no assurance that if we seek external funding, it will be
available on favorable terms, if at all.
Accounts Receivable and Days Sales Outstanding
Our accounts receivable balance and days sales outstanding and modified days sales
outstanding for the quarter ended September 30, 2008 and December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of and for the |
|
|
Quarter Ended |
|
|
September 30, |
|
December 31, |
|
|
2008 |
|
2007 |
|
|
(dollars in thousands) |
DSO |
|
|
79 |
|
|
|
93 |
|
Revenue |
|
$ |
40,794 |
|
|
$ |
39,326 |
|
Accounts receivable, net |
|
$ |
35,779 |
|
|
$ |
40,443 |
|
Modified DSO (1) |
|
|
82 |
|
|
|
82 |
|
Percentage of total net accounts receivable less than 60 days past due |
|
|
88 |
% |
|
|
88 |
% |
|
|
|
(1) |
|
Modified days sales outstanding are computed by adjusting total revenue for the
change in deferred revenue, that result is then divided by the days in the period, 90 days
each quarter, to calculate revenue per day; the accounts receivable balance is then divided by
revenue per day. |
We evaluate our performance on collections on a quarterly basis. As of September 30, 2008, our
days sales outstanding decreased from December 31, 2007 due to collections on support and
maintenance renewals as well as the effect of receiving payments on sales that were made during the
current and previous quarter. The change in the relationship between Modified DSO and DSO during the quarter ended
September 30, 2008 as compared to the quarter ended December 31, 2007 is the result of a greater amount of product
license bookings being recognized from deferred revenue as compared to December 31, 2007.
Credit Facility
On January 31, 2008, the Company chose to allow its credit facility to expire in accordance
with its terms. As a result, the Company was required to cash collateralize $2.1 million in
outstanding letters of credit with certificates of deposit. The collateral for the letters of
credit is reflected on the Companys balance sheet as restricted cash within short-term and
long-term investments. The letters of credit were issued in favor of various landlords to secure
obligations under ATGs facility leases pursuant to leases expiring through December 2011.
32
ART TECHNOLOGY GROUP, INC.
Recent Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 161, Disclosures About Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133 (SFAS 161), which establishes, among other
things, the disclosure requirements for derivative instruments and for hedging activities. SFAS 161
requires qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in derivative
agreements. This statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. We are not currently involved in hedging
activities; the adoption of this statement is not expected to have any impact on our consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51, (SFAS 160), which amends ARB 51 to establish
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also amends certain of ARB 51s consolidation procedures for
consistency with the requirements of SFAS 141 ( R), Business Combinations. This Statement will be
effective for financial statements issued for fiscal years and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of
this statement is not expected to have a material impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, (SFAS 141(R)), a
replacement of SFAS No. 141. SFAS 141(R) is effective for fiscal years beginning on or after
December 15, 2008 and applies to all business combinations. SFAS 141(R) provides that, upon
initially obtaining control, an acquirer shall recognize 100 percent of the fair values of acquired
assets, including goodwill, and assumed liabilities, with only limited exceptions, even if the
acquirer has not acquired 100 percent of its target. As a consequence, the current step acquisition
model will be eliminated. Additionally, SFAS 141(R) changes current practice, in part, as follows:
(1) contingent consideration arrangements will be fair valued at the acquisition date and included
on that basis in the purchase price consideration; (2) transaction costs will be expensed as
incurred, rather than capitalized as part of the purchase price; (3) pre-acquisition contingencies,
such as legal issues, will generally have to be accounted for in purchase accounting at fair value;
(4) the requirements in SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, would have to be met at the acquisition date to accrue for a restructuring plan in
purchase accounting; and (5) in-process research and development charges will no longer be
recorded. While there is no expected impact to our consolidated financial statements on the
accounting for acquisitions completed prior to December 31, 2008, the adoption of SFAS 141(R) on
January 1, 2009 could materially change the accounting for any business combinations consummated
subsequent to that date
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We maintain an investment portfolio consisting mainly of investment grade money market funds,
corporate obligations and government obligations with a weighted average maturity of less than one
year. These available-for-sale securities are subject to interest rate risk. However, a 10% change
in interest rates would not have a material impact to the fair values of these securities at
September 30, 2008 and December 31, 2007 primarily due to their short maturity and our intent to
hold the securities to maturity.
In addition, the fair value of our investment grade money market
funds is subject to change as a result of potential changes in credit ratings of underlying securities driven by the level
of liquidity in the credit and capital market. The potential change in fair value for our credit rating sensitive
instruments has been
assessed and deemed not to have a material impact on our liquidity, cash flow or our ability to fund our operations.
33
ART TECHNOLOGY GROUP, INC.
The majority of our operations are based in the U.S., and accordingly, the majority of our
transactions are denominated in U.S. dollars. However, we have foreign-based operations where
transactions are denominated in foreign currencies and are subject to market risk with respect to
fluctuations in the relative value of foreign currencies. Our primary foreign currency exposures
relate to our short-term intercompany balances with our foreign subsidiaries and accounts
receivable valued in the United Kingdom in U.S. dollars. Our primary foreign subsidiaries have
functional currencies denominated in the British pound and Euro, and foreign denominated assets and
liabilities are remeasured each reporting period with any exchange gains and losses recorded in our
consolidated statements of operations. Based on currency exposures existing at September 30, 2008
and December 31, 2007, we do not believe a 10% movement in foreign exchange rates would expose our
financial statements to significant gains or losses in earnings or cash flows. We may use
derivative instruments to manage the risk of exchange rate fluctuations. However, at September 30,
2008 and December 31, 2007, we had no outstanding derivative instruments. We do not use derivative
instruments for trading or speculative purposes.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30,
2008. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act), means controls and
other procedures of a company that are designed to ensure that information required to be disclosed
by a company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the companys management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure controls and procedures
as of September 30, 2008, our Chief Executive Officer and Chief Financial Officer concluded that,
as of such date, our disclosure controls and procedures were effective at the reasonable assurance
level.
(b) Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the quarter ended September 30, 2008 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
34
ART TECHNOLOGY GROUP, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously disclosed, in December 2001, a purported class action complaint was filed
against our wholly owned subsidiary Primus Knowledge Solutions, Inc., two former officers of Primus
and the underwriters of Primus 1999 initial public offering. The complaints are similar and allege
violations of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934
primarily based on the allegation that the underwriters received undisclosed compensation in
connection with Primus initial public offering. The litigation has been consolidated in the United
States District Court for the Southern District of New York (SDNY) with claims against
approximately 300 other companies that had initial public offerings during the same general time
period. In February 2005, the court issued an opinion and order granting preliminary approval of a
proposed settlement, subject to certain non-material modifications. However in June 2007, the court
terminated the settlement process due to the parties inability to certify the settlement class.
Plaintiffs counsels are seeking certification of a narrower class of plaintiffs and filed amended
complaints in September 2007. We believe we have meritorious defenses and intend to defend the case
vigorously. While we cannot predict the outcome of the litigation, we do not expect any material
adverse impact to our business, or the results of our operations, from this matter.
Our industry is characterized by the existence of a large number of patents, trademarks and
copyrights, and by increasingly frequent litigation based on allegations of infringement or other
violations of intellectual property rights. Some of our competitors in the market for e-commerce
software and services have filed or may file patent applications covering aspects of their
technology that they may claim our technology infringes. Such competitors could make claims of
infringement against us with respect to our products and technology. Additionally, third parties
who are not actively engaged in providing e-commerce products or services but who hold or acquire
patents upon which they may allege our current or future products or services infringe may make
claims of infringement against us or our customers. Our agreements with our customers typically
require us to indemnify them against claims of intellectual property infringement resulting from
their use of our products and services. We periodically receive notices from customers regarding
patent license inquiries they have received which may or may not implicate our indemnity
obligations, and we and certain of our customers are currently parties to litigation in which it is
alleged that the patent rights of others are infringed by our products or services. Any litigation
over intellectual property rights, whether brought by us or by others, could result in the
expenditure of significant financial resources and the diversion of managements time and efforts.
In addition, litigation in which we or our customers are accused of infringement might cause
product shipment or service delivery delays, require us to develop alternative technology or
require us to enter into royalty or license agreements, which might not be available on acceptable
terms, or at all. We could incur substantial costs in prosecuting or defending any intellectual
property litigation. These claims, whether meritorious or not, could be time-consuming, result in
costly litigation, require expensive changes in our methods of doing business or could require us
to enter into costly royalty or licensing agreements, if available. As a result, these claims could
harm our business.
The ultimate outcome of any litigation is uncertain, and either unfavorable or favorable
outcomes could have a material negative impact on our results of operations, consolidated balance
sheets and cash flows, due to defense costs, diversion of management resources and other factors.
35
ART TECHNOLOGY GROUP, INC.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2007, which could materially affect our business, financial condition or
future results. To the best of our knowledge, as of the date of this report there has been no
material change in any of the risk factors described in that Annual Report on Form 10-K, except as follows:
Current macro-economic conditions, including the credit crisis affecting the financial markets and
the possibility of a global recession, could adversely affect our business, results of operations
and financial condition in the remainder of 2008 and beyond.
The worlds financial markets are currently experiencing significant turmoil, resulting in
reductions in available credit, dramatically increased costs of credit, extreme volatility in
security prices, rating downgrades of investments and reduced valuations of securities generally,
and the increased probability of a recession that could affect the U.S. and other global
economies. These events have adversely affected the availability of financing to a wide variety of
businesses, and the resulting uncertainty has led to reductions in capital investments, overall
spending levels, future product plans, and sales projections across industries and markets. We
believe these factors contributed to our lower than expected product license bookings in the third
quarter of 2008. These factors could have a material adverse impact on demand for our products and
services, our ability to achieve targeted results of operations and our financial condition in
future quarters, potentially including:
|
|
|
reduced demand for our products and services; |
|
|
|
|
delayed or reduced product license bookings; |
|
|
|
|
cancellation of eStara ecommerce optimization services
contracts and professional service engagements; |
|
|
|
|
increased pressure on the prices for our products and services; |
|
|
|
|
greater difficulty in collecting accounts receivable; and |
|
|
|
|
risks to our liquidity, including the possibility that we might not
have access to our cash and cash equivalents when needed. |
We are unable to predict the likely duration and severity of the current disruption in financial
markets and adverse economic conditions in the U.S. and other countries, but the longer the
duration, the greater the risks we face in operating our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 19, 2007, our Board of Directors authorized a stock repurchase program providing for
repurchases of our outstanding common stock of up to $20 million, in the open market or in
privately negotiated transactions, at times and prices considered appropriate depending on the
prevailing market conditions. The table below presents information regarding our repurchases of our
common stock during each calendar month with activity in the three-month period ended September 30,
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Approximate dollar |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total number of |
|
value of shares that may |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares purchased as part |
|
yet be purchased under |
|
|
|
|
|
|
(a) Total number of |
|
(b) Average price |
|
of publicly announced |
|
the plans or programs |
|
|
|
|
Period |
|
shares purchased |
|
paid per share |
|
plan |
|
(in thousands) |
|
|
|
|
July 2008 |
|
|
|
|
|
|
|
|
|
|
$ |
15,619 |
|
|
|
|
|
August 2008 |
|
|
|
|
|
|
|
|
|
|
|
15,619 |
|
|
|
|
|
September 2008 |
|
|
|
|
|
|
|
|
|
|
|
15,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
$ |
15,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
ART TECHNOLOGY GROUP, INC.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibits
3.1 |
|
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.1 to
our Registration Statement on Form S-8 dated June 12, 2003). |
|
3.2 |
|
Amended and Restated By-Laws (incorporated by reference to Exhibit 3.1 to our Current Report on
Form 8-K filed on April 23, 2008). |
|
4.1 |
|
Rights Agreement dated September 26, 2001 with EquiServe Trust Company, N.A. (incorporated by
reference to Exhibit 4.1 to our Current Report on Form 8-K dated October 2, 2001). |
|
10.1 |
|
Amended and Restated Non-Employee Director Compensation Plan, as amended on September 16, 2008.* |
|
31.1 |
|
Certification of Principal Executive Officer Pursuant to Exchange Act Rules 13a-14 and 15d-14,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 |
|
Certification of Principal Financial and Accounting Officer Pursuant to Exchange Act Rules
13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1 |
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 |
|
Certification of Principal Financial and Accounting Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
Management contract or compensatory plan. |
37
ART TECHNOLOGY GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
ART TECHNOLOGY GROUP, INC.
(Registrant)
|
|
|
By: |
/s/ ROBERT D. BURKE
|
|
|
|
Robert D. Burke |
|
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
By: |
/s/ JULIE M.B. BRADLEY
|
|
|
|
Julie M.B. Bradley |
|
|
|
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer) |
|
|
Date:
November 7, 2008
38